12 Investing Mistakes I’ve Made (and How You Can Learn From Them)

I've been investing since 1996. In the process, I have learned a lot, mainly from trial and error. I'd like to share my experience with you. Here are some of the mistakes I've made:

Not investing soon enough — I have been working part-time since my first year at college in 1991. If I had known what I know today, I would have invested my money in an IRA from day one. But like many other young adults, I was thrilled to have money and to spend it all on things that I enjoyed — movies, games, electronics, etc. If I had invested just $2,000 per year while I was in college, that $8,000 invested in an S&P 500 index fund would be worth about $36,000 today.

Not knowing the basics— When I finally began investing, my first move was to give my money to a full brokerage firm to invest for me. I didn't know anything about stocks or mutual funds. I just knew I should invest money to make more money. This was a big mistake since each trade executed by my broker cost a lot of money. Also, the mutual funds they picked weren't good, and were very expensive.

Chasing past performance — Once I got smart enough to switch to a discount broker, I committed another mistake. I chose mutual funds based on their past performance and Morningstar rating. I picked several loaded / high expense-ratio funds that lagged the general market in the subsequent years.

Experimenting with my IRA — Back then I had tons of ideas. Unfortunately most of my money was in IRA, so I experimented using my retirement money — big mistake! First, money lost in an IRA cannot be replenished. I was allowed to deposit $2,000 per year and that was the limit. Second, I could not claim my losses as tax deductions. Since the IRA was tax-sheltered, the loss was simply a loss. [Learn more about IRAs.]

Not paying attention to expense ratios — Not until recently did I realize how badly expense ratios can affect investment performance. I always thought “it's only 1%, what's the difference,” and went for the investment with better performance. I finally ran some numbers and I was shocked to learn that a difference of 1% can lower my investment performance by 25% over the course of 30 years. Instead of ending up with $1 million, for example, I might only have $750,000.

Not paying attention to distributions — This is another number that I did not pay attention to back then. I held some funds in my IRA and some in my regular account. For a couple years, I thought high distribution was really cool because I was making more money. How silly was that? Now I realize that I am paying other people's taxes when I get mutual fund distributions. Now with my regular account, I invest either in low distribution funds or in ETFs. (Distributions do not affect IRAs.)

Not paying attention to asset allocation — Way back when, my investment was mainly in large-capitalization U.S. stocks and funds. I did not know about asset allocation as a risk management and performance enhancement tool. It wasn't until 1999 — when I became eligible for a 401k — that I started giving asset allocation serious thought.

Ignoring diversification — Again, with little experience and little money to invest, I was going after high-flying stocks (at least I thought they were) and did not pay any attention to diversification. Like asset allocation, it took me a long time to realize how diversification helps to reduce risk and enhance performance. The value of diversification became apparent to me at about the same time that asset allocation did.

Selling winners and keeping losers — This was my all time weakness. I knew the concept of “buy low and sell high.” So with little experience, I ended up selling a lot of my winners like Staples (SPLS), Ameritrade (AMTD), and Microsoft (MSFT) to lock in the gain; but held on to my losers like Flemings (FLMIQ) and eToys (ETYS).

Cost averaging down — This was another “buy low and sell high” mistake. Not only did I hold on to my losers, I bought more shares in hope of lowering my cost basis and reducing my losses. I did this blindly without additional research to find out why these losing stocks went south.

Investing without a goal — Not until recently did I define a real goal for my investment — among other things, one of my investment goals today is to build a $1 million investment portfolio by 2017. This is my main retirement portfolio. Other goals, which I am still defining, are investing to subsidize my kids' college expenses and my parent's retirement expenses. Without a clear goal, I was chasing short-term performance and was prone to act on market swings.

Selling on corrections & buying at the top of the market — These are symptoms of not having a clear goal. Since I was chasing short-term performance with the objective of making more money. I occasionally gave in to my emotion and sold my investments during corrections to protect my gains. Occasionally, I did come out ahead, but most of the time I ended up rushing to reinvest my money as the market invariably rose after these corrections.

As you can see, I was not a very good investor, and it took me a long time and too much money to learn from my mistakes. I hope that by sharing these common pitfalls, you can avoid some of them on your journey. Good luck with your investing!

Great lessons. Posts like this are why my 401k is entirely in index funds, including a Europe/Australia/Far East (EAFE) index, along with 10% bonds and 10% money market. And one weakness, 5% company stock. But it pays dividends, so by the time I retire it would have to have fallen more than 50% to lose value. Maybe more with the dividends being reinvested… Too much work to do the real math on that one.

Number 6 is a very good point though. Dividends are great for tax-sheltered accounts, but otherwise taxes have their way with them and you get the leftovers.

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Pinyo

12 years ago

@J.D. – thank you for the opportunity to present my work to your readers. It’s a huge honor.

@Justin – thank you for the comment. I now keep my company stock at 5% as well. Used to have too much and it plunged — the lowest point was at 4.5% of the high point. That really hurts.

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SJean

12 years ago

Great list, thanks! I don’t know anything about distributions, but once I open a non-401k investment account (still on the horizon!), I’ll be sure to learn what they are, and how to avoid them.

Thanks again

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kim

12 years ago

how would you invest $40,000.00 for a large return?

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The Financial Philosopher

12 years ago

I often say that a mistake is a “philosopher’s” greatest tool for growth…

In response to your insightful blog post, I’ll also say that a good “fee-only” advisor would likely have prevented every one of those “mistakes.”

Finally, emotions can wreck a portfolio…

“A wise man should have money in his head, but not in his heart.” –Jonathan Swift

Thanks for the article…

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Mrs. Micah

12 years ago

Thanks for sharing those, Pinyo. I’m still young, so hopefully if I learn these the less-hard way, my investment future will be brighter. Great post.

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Pinyo

12 years ago

@SJean – Thank you. When a mutual fund sell underlying stocks, it generates capital gain tax on these sales. The cumulative capital gain tax is distributed to each fund shareholder once per year. @Kim – I would start by learning about mutual funds and Exchange-Traded Funds. Many people start out with Vanguard Index Funds. @The Financial Philosopher – I agree that a good fee-only advisor would have helped. However, I prefer to learn on my own. That said, I would not hessitate to utilize one if I have to work through more complicated financial situations. @Micah – by visiting and… Read more »

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James

12 years ago

Great post! I am still young (23) and I feel very fortunate to have had this knowledge passed on to me early in life. Thanks Pinyo for the great info, and JD for this blog, and the whole rest of this community for all of the support and knowledge you guys share. If possible, I’d love to see a series on investing that delves into these topics more deeply. Right now, I’m trying to figure out the whole diversification/asset allocation and whether to go with Mutual Funds, ETFs, Individual stocks etc.

Great post. While I tend to ignore point 8 in favor of a focus on real estate investments, most of these are spot on in any investment approach.

The only thing I might add is to repeat your point No. 1 about 10 more times. I, like you, lament not starting earlier. Here’s to your looking back from 2017 with nothing to lament!

Mike

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Bunk

12 years ago

These are all great tips for any newcomer or anyone who has been trading for years. I would also like to add to no underestimate the power of compounding gains when investing. Kudos on the good blog you have here!

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Maitresse

12 years ago

I hear ya on not starting sooner!

Other than that, this post made me feel a lot better about my own investment strategies. 🙂

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Aleks

12 years ago

“The only thing I might add is to repeat your point No. 1 about 10 more times. I, like you, lament not starting earlier. Here’s to your looking back from 2017 with nothing to lament!” That’s crying over spilt milk, though. As the saying goes, investing is like planting a tree, the best time to start is 20 years ago, the second best time is right now. Your past self probably wouldn’t listen to your current self, even if you could go back in time and impart the wisdom of the ages. Most people probably were told this stuff when… Read more »

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David

12 years ago

Yes, not letting your winners ride is a big one.

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AskProfit

12 years ago

Great Post! These are excellent tips and will go a long way.

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JenK

12 years ago

Aleks, you remind me of another quote: “Forgiveness means giving up all hope of a better past.” -Landrum Bolling

It’s hard to give up the woulda, coulda, shouldas. But doing so gives you more energy for what you’re doing right now.

🙂

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Pinyo

12 years ago

@James – Thank you. Only 23, you’ll probably be doing even better than me then! 🙂 As for asset allocation, it’s a very personal subject. Right now, I put 20% in large, 20% in mid-cap, 20% in small-cap, 30% in international, 5% in REIT, and 5% in company stock. Some people will think this is a decent allocation for a 33 yrs old; some will think it’s bad portfolio because I am not carrying any bonds. There’s a lot on the Web about this topic, so I encourage you to look around. The allocation shared by Todd is an option… Read more »

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askprofit

12 years ago

These are great points and very helpful for anyone out there trying to invest their money. It can be very intimidating to the average person. I think the major point is having a clear goal to work towards. Thanks!

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InvestEveryMonth.com

12 years ago

I think “not starting early enough” is one of the biggest factors. People are automatically handicapped if you don’t have a family member or high school teacher who clues you into the power of compounding interest at an early age.

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Mariette

12 years ago

Pinyo, I hear you about wishing you had begun investing earlier. Better late then never though, eh?

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Irfan

12 years ago

Very Nice insights drawn from mistakes on investing. I am also young and just starting to look for opportunities to invest. Getrichslowly is something that many youngsters wont understand, we usually want to getrichnow 🙂 However, tomorrow I will be a day older and understand why I cant just get rich now.

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Kacper

12 years ago

I wish I read this post 3 years ago.

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Pinyo

12 years ago

@InvestEveryMonth – Great point. I was handicapped as well. On my blog, I have a post where I advocate teaching money management in high school. I think it’s absolutely critical since we can’t count on ALL parents to pass on good financial advice.

@Mariette – yes, the fact that I got started was a good thing. Even if I made my fair share of mistakes.

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Ben

12 years ago

Just invest in ASTI and you’ll be fine!

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Mick Russom

12 years ago

This is just a bunch of platitudes and not a method.

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Mark

12 years ago

As you can see, I was not a very good investor, and it took me a long time and too much money to learn from my mistakes. Why should we listen to you now? Show me the money!. Your blog seems absolutely crammed with various advice about how we should do this and that about investing, but I don’t see you sharing your portfolio or investing decisions with us. What is your actual rate of return? Mine’s been an annualized 40+ percent since the beginning of 2005. Every single one of those investments has been recorded online as I made… Read more »

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Pinyo

12 years ago

@Irfan – thank you. Get rich slowly is the best way to do it. There is no such thing as get rich quick for common folks — very few individuals manage this feat. @Mick – from your perspective, it might be obvious to you and some people, but this is not true for everyone. If you are looking for a method, it will take more than a blog post to accomplish this and you are probably looking at the wrong place. @Mark – I am not sure if you addressed me or J.D. I can’t speak for J.D., but my… Read more »

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Mark

12 years ago

Great! Thanks the kind of info I was looking for. It would be nice to see your buy decisions from beforehand, though. That way we could see how you evaluated your investments (and maybe even pick out some of the same ones next time you buy).

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Mick Russom

12 years ago

“I don’t own any fancy stocks, but I did manage to beat the S&P500 for the past 7 years. ” Now adjust your % return against the commodities price index, printed weekly in The Economist. The CPI for the dollar went from 100 in the year 2000 to 205 in September 2007. That would mean your investments would have to at least doubled for the purchasing power to be equal. That is doubtful. The Fed itself said that a moving average of CPI is a better indicator of inflation. http://www.newyorkfed.org/research/staff_reports/sr236.html The problem with investing right now is its a distraction… Read more »

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eric the beehivehairdresser

12 years ago

Great story. I’d like to recommend to anyone out there looking for wise ways to invest first read “The Intelligent Investor” (1949 or any of the replubishing dates) by Benjamin Graham – take the slow approach to investing, read, learn, and take your first footstep in the market with a plan containing real knowledge.

It’s well worth it.

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Pinyo

12 years ago

@Mick – you are obviously a lot more knowledgeable than I am because I don’t know anything about economy. I can only measure my performance against what I know, and if I can beat S&P500, I am happy. However, I will try to read up on the information you posted and see if I can learn it.

Secondly, I am aware that USD is going down the toilet in term of value. I have relatives that live in other countries and I travel internationally, so I am painfully aware of this.

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Mark

12 years ago

@eric: I second your recommendation of Graham’s The Intelligent Investor. Along with Peter Lynch’s One up on Wall Street, it’s my all-time favorite.

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Mick Russom

12 years ago

@Pinyo I understand. People need to investigate the purchasing power of dollars when they get paid in dollars and accept risk to get more dollars. The M3 is no longer tracked by the Fed, but it is a vital indication of much the money supply is expanding. Expanding money supply means inflation. The M3 is now being tracked by others as the M3b, here: http://www.nowandfutures.com/key_stats.html Please also keep the CPI in mind, The Economist has that here: http://www.economist.com/markets/indicators/ And this weeks CPI: http://www.economist.com/images/20070929/TAB3.gif Oh man I just looked. Its 216 this week. This is really bad news. All investors really,… Read more »

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bob

12 years ago

um, #9 Selling winners and keeping losers. When did you actually determine they were winners or loosers – after you sold? You have no way to predict if either will continue to go up or down 🙂

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beanspants1

12 years ago

No one under 50ish should have any bonds. the return is too low, and can be more or less matched with a money market with none of the holding time penalties.

And if you live in the US, there’s no need to index your gains against the falling dollar, because even if the dollar falls, Purchasing Power Parity remains. Diversifying into foreign stocks is a good idea, and would be even if the dollar were rising.

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beanspants1

12 years ago

and the ‘selling winners and holding loosers’ sounds dangerously like attempting to time the market. you should have sell points and buy points, and sell or buy when they are met.

They can be variable and time based, say up 30% in a year, or down 10% in a month, but you shouldn’t try to guess when a gain is gonna turn on you, or you will probably get burned and angry more often than you win.

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Mick Russom

12 years ago

@beanspants “Purchasing Power Parity remains”

Wrong. Check out the price of gas since 2003. Houses since 2003 (then normalize against gold). Check out the prices of food since 2003.

Your PPP bull only works with Core inflation (the walmart chinese plastic index).

But for everyday Items, look to the big mac index and the commodities price index, the price of gas and foods, and oh wait, your Purchasing Power Parity turns out to be a simple lie. Its a lie. you cant tell me its not a lie because prices are rising.

QED, proved PPP with “core” inflation numbers is a lie.

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beanspants1

12 years ago

oh please. so the price of a few things are up since 2003 (what an odd date to pick, and currently, housing seems to be diving, so does that mean we are in a period of deflation?), so therefore, inflation is higher than what the gov’t posts. Is that correct? people, please don’t listen to this craziness. The simple story is that inflation (yes, the gov’t calculation) is the basis for the risk free rate, or the short rate. You know, that 5ish percent value right now that Bernake just cut. Large investors and corporations need their return right around… Read more »

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Mick Russom

12 years ago

beanspants1 just declared a “few items” went up. Energy went up food went up gold oil metals all other currencies What items can you buy that are not made from these commodities? None. Housing is diving because of the fact that not even the Fed lowering rates and discount window is enough liquidity for now nervous underwriters to provide loans for idiotically overpriced houses. You are trying to use housing and say there is an overall deflationary trend? Idiotic. You second paragraph is bunkum. The fed itself says so here: http://www.newyorkfed.org/research/staff_reports/sr236.html I never said to tie the currency to gold.… Read more »

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JC Carvill

12 years ago

I have really loved learning from your mistakes. As an investor, I am always willing to learn from other people who have experienced the market.

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Mick Russom

11 years ago

Gas, nationwide $4.00 and rising. Like I said before, the costs of living will rise far quicker than your ability out make money on investments … I only wish that I had been wrong … Time will continue to prove me correct until either sane policy or a collapse occurs. See: George Soros: ‘We face the most serious recession of our lifetime’ http://tinyurl.com/6yfuqm See: It’s going to be much worse – Famed investor Jim Rogers sees hard times ahead for the United States http://tinyurl.com/27x93m “Jim Rogers says the Fed, and Fed Chairman Ben Bernanke, are out of control.”

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mike

11 years ago

uABoms hi! how you doin?

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thom Adams

5 years ago

J,

Nice list. I have my own history of big wins and big losses. After 30 years of stock market study and investing here’s my advice to any individual investor:

Realize that the cards are stacked. Usually they are stacked against you. You have better odd at gambling casinos unless you are an insider who can and will act on insider knowledge (yeah, its illegal and done every second of every day by many).

NEVER believe what you read, even in annual reports.

The ONLY way to win is ude of the “greater fools theory”.

PERIOD.

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Hi! I’m J.D. Roth. I'm here to help you master your money — and your life.

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